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Choosing Between a Secured and Unsecured Credit Card

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Credit cards can be found in nearly every wallet and purse in America, so most small business owners with good credit already have access to that type of financing. But what can you do as an entrepreneur if your credit score isn’t the greatest? Should you get a secured credit card? Read on to learn the difference between unsecured and secured credit cards and which one is right for your business’s situation.

What is a secured credit card versus an unsecured credit card?

Since their inception in the 1950s, credit cards have been a common payment method for most Americans. In fact, a report by WalletHub using data from the U.S. Census Bureau and Nilson Report found that there were approximately 1.12 billion credit cards in the U.S. as of 2018. By 2023, that number is expected to go up to nearly 1.3 billion.

The report also estimated that the average number of credit cards per U.S. adult was just over three in 2019, with an average total balance of $6,629. And while Experian estimates that the country had approximately $830 billion in credit card debt in 2019, most of that is held through unsecured credit cards. [Read related article: Do You Need a Small Business Credit Card?]

The difference between a secured and unsecured credit card

On a very basic level, the major difference between these types of cards is that a secured credit card requires some sort of monetary deposit to act as collateral, while an unsecured credit card doesn’t. An unsecured card generally has lower interest rates and higher credit limits, while a secured card can serve as a way for people with bad credit to boost their credit scores.

Unsecured credit cards: The common option

If you have a credit card right now, the odds are extremely high that it’s unsecured. While the term “unsecured” may sound risky for you as a consumer, it more accurately describes the risk that the card’s issuer has taken on, since it acts similarly to an unsecured bank loan and does not require a deposit or other form of collateral.

Without the additional assurance of collateral from you, the terms of an unsecured credit card depend largely on your credit history. If you apply with a good credit score, you’ll be more likely to get a higher credit limit, more favorable interest rates and additional perks, like travel miles and cash back. However, if you have a lower credit score and you try to get a credit card, the opposite will be true: You’ll receive a smaller credit limit, higher interest rates and little or no additional perks – if you get approved at all. What determines a “good” score and what constitutes a “bad” score vary among the three credit bureaus: Equifax, TransUnion and Experian, though a score in the 700 range is typically considered a good place to start.

Rather than receive collateral to protect their investment, banks and credit card issuers reduce their risk by leveraging their ability to punitively affect your credit file if you regularly miss payments or overcharge your account.

In most instances, delinquent accounts are reported to the credit bureaus, resulting in a decrease in your overall credit score. Such an infraction on your record is considered a major issue to other creditors and remains on your file for years as a red mark for why you should be denied additional credit or loans.

Other courses of action for credit card issuers and delinquent accounts include taking your account to collections, seeking wage garnishments to offset their losses or filing a lawsuit against you. [Read related article: The Pros and Cons of Financing a Startup with Credit Cards]

Secured credit cards: The safe option for creditors

While unsecured credit cards pose a potential risk for card issuers, secured credit cards come with some assurances baked in at the expense of the borrower. Unlike an unsecured credit card, a secured credit card requires the cardholder to make a cash deposit that the credit card company holds as collateral.

That deposit usually sits in the $200 to $300 range and will act as the card’s available credit limit. Naturally, a higher deposit will yield a larger credit limit. This deposit is a one-time cost to the borrower that can be refunded once they’ve either proved their ability to maintain the account in good standing or the account is closed.

Because these cards are backed by collateral, banks and credit card issuers are more likely to approve applications for all kinds of users, including people with no credit or low credit scores. As a result, these cards are generally seen as a safe, yet slow way to build a credit score. [Read related article: Opening a Business Account When You Have Bad Credit]

“If you miss a payment on a secured credit card, the money is simply taken out of your security deposit, and the missed payment is not reflected on your credit report,” said Michael Broughton, co-founder and CEO of Perch. “If you do carry a balance, interest will be incurred, and the balance will be reported to the bureaus just as it would with an unsecured card. Using a secured credit card can help some build their credit in as little as six months.”

Like unsecured credit cards, unpaid bills result in punitive actions that could lower your credit score. A late payment usually comes with an additional fee before getting a higher interest rate tacked on. The longer your payment is past due, the higher your rate will go, until the card is closed and you lose your deposit. Eventually, the account will be sent to collections, at which point your assets could be in jeopardy.

What are the benefits and drawbacks of secured and unsecured credit cards?

Aside from their collateral requirements, unsecured and secured credit cards come with their own inherent benefits and drawbacks. In the case of both cards, you can potentially raise your credit score by diligently making your payments on time, though the other side of that statement is also true. Both cards also give you access to capital that you didn’t already have on hand, and both prove your creditworthiness in some way.

And while the two credit card types share some benefits, they also share downsides. For instance, both card types can lead to collections agencies getting involved if your account is unpaid by 120 days, though if that happens, both card types will have negatively impacted your credit score well before then. Additionally, both unsecured and secured credit cards can require a “hard pull” on your credit file when you apply for a card, resulting in a potential hit to your score. This issue is somewhat less likely to happen with secured cards, since they require collateral.

Though unsecured cards generally have lower interest rates, they can still be quite high. As previously mentioned, average rates can be upward of 20%. If you’re making just the minimum monthly payment with a high APR, you’re likely not making much of a dent in your principal. Likewise, if you’re not paying off your card in full each month, a high APR means you’ll pay more than the initial cost of whatever you purchased with the card.

Benefits of an unsecured card

As unsecured cards are the most common type of credit card, you’re likely already familiar with many of their advantages. Here are some of the pluses of using an unsecured credit card responsibly:

Lower APR. If you have an unsecured credit card, it’s likely that you have a decent credit score. As a result, a bank or credit card issuer will feel more comfortable offering you a lower interest rate. Because a lower interest rate means your monthly payments will be smaller, it serves as an incentive to continue using the card. With a lower rate, you can continue to build credit by stretching your limit a little further.

Though unsecured cards’ interest rates are generally lower if you have a good credit score, the rates are still often higher than those for most small business or personal bank loans, averaging between 15.53% and 22.76%, U.S. News reported.

Higher credit limits. Again, because you likely have a reasonable credit score, you will likely be trusted with a higher borrowing amount. With an increased credit limit, you instantly gain access to bigger-ticket purchases without fear of getting too close to that limit.

A larger credit limit also affects your overall credit utilization ratio, which is the amount of credit available to the user versus the amount of debt they’ve incurred. Credit bureaus use your utilization ratio as a metric to see how responsible you are with your credit. A higher percentage of credit used may indicate to lenders that you’re a costly and potentially risky borrower.

More card options. As this is the most common type of credit card, your options vary wildly. Credit cards are issued by so many entities, from national and local banks to individual retailers, that it’s very likely that you can find an unsecured card that fits your needs.

Rewards for using credit cards. Credit card issuers want borrowers to use their cards, since they make money on the interest and any additional credit card fees. One way they often do that is by offering special rewards to their users. If this is a major selling point for you, then be on the lookout for cards that offer cash back, discounts at certain businesses when using the card or travel mileage that can be redeemed for airfare, among other perks.

More frequent reports to credit bureaus. Credit card usage is just one part of your overall credit score, but it’s among the most heavily weighted items. Because your unsecured credit cards represent risk to card issuers, they often report the health of your credit card usage to credit bureaus on a monthly basis. This kind of granular influx of data can help you understand how you’re doing and provide you with ways to improve your score. This can often become a double-edged sword, however, since late and missed payments are also reported frequently.

Drawbacks of an unsecured card

Though an unsecured card has many benefits, there are also some negatives to having or trying to obtain one. Here are some of the drawbacks:

Different requirements for each card. Because unsecured cards are ubiquitous, it’s increasingly rare to find two credit cards that have the same requirements for approval. Credit score requirements vary from issuer to issuer, so whereas one card may require a 580 credit score for consideration, another may demand a score of 700. This kind of variance means you’ll have to do your research about not just your credit score but also what that score needs to be to obtain the card you want.

Added fees. Depending on the type of credit card you use, there may be additional fees baked into your agreement. The most common fee added to an unsecured credit card is an annual “convenience” fee, which can range from $20 to $200. There are enough cards on the market that don’t charge an annual fee, so you can avoid this drawback simply by choosing a card without one. Other fees – like late payment fees, balance transfer fees and cash advance fees – should be expected if you meet the requirements for those fees.

Benefits of a secured card

Though a secured card requires you to deposit money as collateral, this type of card has some unique benefits. Here are some of the advantages:

Refundable deposit. As long as you consistently make payments on your account and eventually pay off the balance in full, your deposit is refunded to you. This can help serve as a goal to keep in mind as you’re using and paying back the card over time.

Credit building. If you have a bad credit score, it will be nearly impossible to get a decent unsecured credit card without exorbitant interest rates and minuscule credit limits. By requiring collateral of some kind, credit card issuers are more likely to approve individuals with bad credit as a way to help them get out of the hole they’ve dug themselves into. In some cases, the secured card can eventually get upgraded to an unsecured card. Keep in mind that a secured card only reports payment history, resulting in a slower climb.

Drawbacks of a secured card

Here are some of the downsides to be aware of before getting a secured credit card:

Required deposit. As previously mentioned, to get a secured credit card, you must make a cash deposit of up to $300. If you need a higher credit limit, you may have to add more money to your deposit.

Smaller credit limits. Credit limits for secured cards are usually just the security deposit you put down. As such, your credit utilization ratio will be much tighter than with an unsecured card.

Additional fees. Like unsecured credit cards, secured cards often have a range of additional fees tacked on, such as monthly maintenance fees, annual upkeep fees or incidentals. These are nonrefundable and can add to the overall cost of the card.

Lack of reporting to credit bureaus. Not all secured credit card issuers report these cards to the three bureaus. If you’re relying on such a card to help build your credit, it’s imperative that you make sure the card issuer reports the account’s activity, since not doing so will make your efforts entirely moot.

Which type should you choose?

When deciding which card you should get, consider where you are in your credit score journey. While an unsecured card may be great if you’re just looking to maintain or increase your already decent credit score, a secured card could help you get out from under a bad or nonexistent score.

“Both secured and unsecured credit cards have their advantages, but the need for each depends mostly on your credit score and your financial goals,” Broughton said. “If you have trouble with qualifying for an unsecured card, a secured card is your best option for credit building through a card.”

While most people will want to obtain an unsecured card, a secured card should most often be considered only if you have zero credit history or your credit score is too low for an unsecured card.

When choosing between the two types of cards, the business owner should consider the current marketplace and potential issues they could face, said Matthew Dailly, managing director of Tiger Financial. “Having a secured credit card could really help to protect them if something comes along which stops their income – COVID-19 being the perfect example.”

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Are Buy Now, Pay Later Apps Better Than a Credit Card?

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You might think BNPL saves you money and time, but it can cost you big if you’re not careful.

If you’ve noticed a lot more “buy now, pay later” apps popping up when you check out with online retailers, it’s because they’ve become increasingly popular.

This comes as no surprise when you consider how younger generations are hesitant to use credit cards. According to a new study on buy now, pay later (BNPL) apps done by The Ascent, 67% of millennials don’t have a credit card. For some, that’s because they can’t get approved, and others prefer to avoid credit. Many don’t think it makes sense to use a credit card for small, everyday purchases and are worried about the impact of credit cards on their credit scores.

Which one is better: BNPL apps or credit cards? The answer, as you might expect, is: It depends.

Better for ease of approval: Buy now, pay later

One of the main draws of BNPL apps is that they typically don’t require credit approval, and most don’t even involve a hard pull on your credit report.

This is good news for folks with bad credit or no credit at all, and it’s helpful for anyone who wants to keep credit inquiries to a minimum. Having multiple new inquiries on your credit report in a short period of time — and credit card applications are considered an inquiry — can cause your credit score to drop.

Shopping with an online retailer and paying with a BNPL app at checkout is certainly convenient. It means you don’t have to fill out a lengthy application and wait to see if you’re approved. However, just because it’s easy doesn’t mean it’s a wise choice.

Better for improving your credit score: Credit cards

Using a credit card regularly and paying it off in full and on time each month is one of the best ways to build credit. Of course, credit cards don’t inherently improve your credit — responsible credit card usage does. Late payments and delinquent accounts can completely wreck your credit score. And, as discussed above, the credit card application itself can ding your score slightly.

Many BNPL apps, on the other hand, don’t report on-time payments to the credit bureaus. This means you won’t get credit for them — pun intended. On the other hand, any failure to make your payments can be reported to the credit bureaus and damage your score.

Credit cards have the potential to either help or hurt your credit depending on how you use them. In contrast, a lot of BNPL apps only have the potential to drag down your score if you fail to pay off your balance.

Better for avoiding interest: It depends

Every BNPL option has its own set of terms and conditions, so it’s important to read the fine print before making a decision. Some come with an interest-free period, while others charge interest rates of up to 30%. You typically won’t be charged any fees to use a BNPL service if you take advantage of an interest-free promotion and pay off your full balance within the interest-free period and on time. That said, most of these services do charge late fees and returned payment fees if you don’t have sufficient funds in your bank account to make one of your scheduled payments.

The decision between a BNPL app and a credit card comes down to interest, so you should know the interest rate on your credit card. You can find that information on your monthly statement. If the BNPL app you’re considering charges interest, compare the rate to what your credit card would charge. In either case, you’ll likely pay a premium to put the purchase on credit, as the interest rates on credit cards and BNPL apps are extremely high.

Often, BNPL apps will offer an interest-free period, which is what can make them so enticing. A typical interest-free offer will break up the total cost of your purchase into four installments, asking you to pay 25% of the purchase price up-front and then make the remaining three payments every two weeks.

If you do this, you’ll have six weeks to pay off the purchase and won’t have to pay any interest. This makes it a slightly better deal than a credit card, which typically has a grace period of 21 days, or three weeks, before interest is assessed on a purchase.

However, if you miss a single payment or fail to pay off the full purchase by the end of the interest-free period, even if you only have a few dollars left to pay off, you could be in for a rude awakening. BNPL interest rates are typically far higher than those charged by credit cards. Some even charge what’s called “deferred interest,” meaning interest accumulates on the original purchase price, not the remaining balance. What’s more, some of these services charge late fees as a percentage of the original purchase value, which can be very costly.

In other words, BNPL services can save you money on interest, but they can also cost you a lot more if you’re not careful. They also give you a very short period of time to pay off your purchase interest-free, especially when compared to 0% intro APR credit cards with 18-month introductory periods.

Better for big purchases: Credit cards

Most BNPL apps are meant for smaller items — think a few hundred dollars — rather than major purchases. If you’re looking to finance something in the thousands of dollars range, you might have trouble finding a BNPL app that will help you out. Credit cards tend to come with higher credit limits, especially if you have good credit and a decent income.

That being said, financing an expensive purchase on a credit card is typically not a good idea either, due to the high interest rates. The only time you should consider putting a big-ticket item on credit is when you can take advantage of a good 0% intro APR credit card. Even then you need to be certain you can pay off the balance before the introductory period ends. Otherwise, you’ll end up getting slammed with massive interest fees.

Saving enough money to pay up-front is almost always the best way to pay

In most cases, the best way to pay for a purchase is to save up the money first and buy it outright. This ensures you’ll avoid interest fees, debt, and potential credit damage.

This isn’t always possible, but it is a best practice you should exercise for any non-essential purchases. Instead of swiping your credit card or using a BNPL app, open a free savings account specifically for that goal and transfer money into it once each week. Wait until you have enough money saved to buy the item you’ve had your eye on.

It won’t get you instant gratification, but it also won’t cause you to stress about making your payments or land you in debt. And that is priceless.

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It’s never too early to monitor your kid’s identity

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As children return to school, security experts want parents to add one more thing to their yearly checklist – safeguarding their child’s identity.

Monday is Child Identity Theft Awareness Day.

“This is a huge problem that frankly no one is aware of if they’re not paying attention to it, because it feels like an adult crime and it couldn’t possibly happen to a child, but it does,” said Eva Velasquez, President and CEO of Identity Theft Resource Center.

Recent studies show over 1 million children are impacted each year, with losses over $2.6 billion.

This year, new government programs for COVID-19 relief have created new vulnerabilities.

Children are prime targets because thieves can use their credentials to build credit history over time, then take out loans, open credit cards and max them out.

It can take months or even years for parents to realize their kids now have bad credit.

“The detection methods adults use just by engaging in the outside world, those aren’t there for children and the thieves realize that and they know it can go undetected for long periods of time,” said Velasquez.

The center says it’s never too early to start monitoring your child’s identity.

Teach them cyber safety as they get older and watch for red flags.

If you get something in the mail for your kid that looks like it should be for adult, don’t write it off as a mistake.

The biggest recommendation is to freeze your child’s credit. It won’t solve everything, but it will significantly lower risks.

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4 Signs of a Online Loan Scam

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Over the years, complaints about online loan scams are fortunately decreasing, thanks to warnings about loan scams and more reputable online lenders surfacing nowadays. However, even though the number of people getting scammed is steadily decreasing, the amount of money these scams are getting is still massive.

A report made by the Federal Trade Commission stated that consumers had lost about $905 million back in 2017, which is significantly higher than 2016’s $63 million. The FTC has made general guidelines about online scams through credited education, awareness programs, and even enforcement. However, even with all that, consumers are still losing millions through these fraudulent activities.

Typically, financial scammers primarily prey on people who have been previously denied a loan and desperately need money. For people like them, the need to borrow money is stronger than the urge to be vigilant about the loan they are applying for, making them easy prey for online loan scams. Even then, we need to be vigilant. That said, here are some signs you should watch out for to see if you are applying for an online loan scam.

No Credit Check

Now, don’t get us wrong. Not all lenders who don’t look at your credit history are scammers. Some alternative lenders are more interested in your income or profits (if you are running a business) rather than your credit history or merely running online loans for people with bad credit.

However, that doesn’t mean that you don’t have to be vigilant when encountering a lender that doesn’t require a credit check. If you base your decision on whether it’s a scam or not, merely seeing if they do a credit check is wrong.

It is essential to take note that most reputable lenders do a credit check. This is important to them because it helps them determine if you are a risky borrower or not. On the other hand, fraudulent loans aren’t even interested if you can pay the loan. They relish the fact that the borrower can’t repay the debt to incur more fees and penalties upon the borrower.

Upfront Fees

Some lenders will make you pay money in advance before doing any service. This is a red flag. The lender will disguise these as application fees or introduction fees.

Some even disguise these fees as document fees for them to process your application. It’s like them saying you need to send them money first before sending you money for the loan, which is 100% a scam if you ask us.

It is important to remember that any penalties, application fees, and whatnot will be rolled into repayment, or the principal cost when you get approved for the loan.

Unregistered Lender in Your State

All personal loan companies or any financial companies must be registered to the state they operate in. Their registration must pass through the State Attorney General’s Office, which will help the state monitor its businesses. This is applicable even if they operate online.

Online loan scams will typically say they are out of the state’s reach because they are online or a foreign company, which is what a scammer would say. If they operate outside of the state laws, they might be lending money illegally, or it’s an outright scam. When you find one, you can report them to the authorities to prevent these lenders from scamming other people.

If you aren’t sure whether they are legal, you can always check the State Attorney General’s Office if there are some complaints made about them. This might take time, but remember, we are talking about your money here. What is a week of waiting compared to you losing money over a scam?

They Demand a Credit Card

Under no circumstances will a lender or any other legitimate financial institutions demand your credit card or a photocopy of your credit card. If a lender asks for your credit card, it is a scam. They will typically say it is for insurance or some other excuse.

Legitimate financial companies will ask for a payment for the credit report, appraisal, or application, but those charges will be forwarded to your loan, not to your credit card. This is a popular way for scammers to get your money since credit from your credit card is virtually untraceable by the authorities. You also can’t report it to them because you voluntarily gave it to the scammers.

Remember to never give away your credit card or your credit card information to anybody, no matter how legitimate they sound or for any purposes. Doing so will rack you up tons of debt that you may never pay for for the rest of your life.

Takeaway

Online loan scams are still prevalent, even though the cases are steadily decreasing over time. Always be vigilant, especially if your money is at stake. Never give these scammers a chance to get any of your info, no matter how insignificant it is, especially your credit card information. Keep safe.

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